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IPO and Regulation of Listed Companies – An Introduction

Why is it important to know about the regulatory framework for listed companies?

The largest companies in the world are listed entities for a very simple reason – access to public capital is cheap. When a company has a successful and proven business model and intends to scale further, raising finance from the public is the most convenient route. It may enable a company to generate larger volume of capital than approaching an institutional investor, a private equity fund or a bank. The deal size or transaction volume of listed company capital generation and financing transactions is extremely high, which renders working on a listed company transaction very rewarding for any business advisor.

Activities of a listed company, particularly raising finance, are heavily regulated.

How will these skillsets help an advisor, a lawyer, professional or a businessman?
M&A lawyers in Indian law firms spend almost all of their time advising or assisting clients on acquisitions and takeovers and initial public offers, hence law students and business lawyers are strongly advised to read this. 
Several Chartered Accountants, Company Secretaries and business consultants also have a very lucrative practice in the M&A advisory space. For businessmen, CFOs and finance professionals, knowledge of such regulations is extremely important for developing financial strategy and for relevant decision-making inputs.

A business consultant or professional’s can use these skillsets to offer inputs and assistance around:

  • Capital-raising strategy
  • Handling regulatory difficulties
  • Preparation of relevant disclosure documentation, applications for approvals and furnishing certificates where necessary (such as a valuation certificate) for a financing transaction.
  • Negotiation, using the inputs provided in earlier modules.
Now, let us understand the process of listing and how compliance requirements evolve once a company is listed.

i)    Introduction to listing - Eligibility Requirements for Listing

Conventionally, most businesses are structured as private limited companies. It should be noted that a private company is not permitted to be listed on a stock exchange. Prior to listing, it must be converted into a public company. The conversion process requires a special resolution of the shareholders to convert into a public company and to raise the minimum paid-up capital at least to INR 5 lakhs (usually much more), and to adopt a new set of articles of association.

Note: The minimum paid-up capital of INR 5 lakhs is applicable to unlisted public companies. For companies that intend to list, their post-issue paid-up capital should be much higher, as explained in the paragraphs below.

Listing requires companies to comply with different regulations issued by the Securities and Exchange Board of India (the SEBI), the regulator for the securities market. SEBI has issued extensive regulations for reporting and compliance by listed companies and market intermediaries (that is, middlemen who provide an interface or platform for buyers and sellers of securities to interact), such as stock brokers, depositories (which holds shares in demat form), etc.

In order to make a public issue, a public company must fulfil certain ‘eligibility criteria’ specified in the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (ICDR Regulations). These criteria require companies to have a high amount of assets (minimum of INR 3 crores) and net-worth (minimum of INR 1 crore). Minimum paid-up capital requirements are also quite high – INR 10 crores if the company is listed on the main board. Alternately, if a company cannot meet such requirements, a significant portion of its shares in the IPO must be subscribed by large financial institutions (see the Annex for a detailed list of these criteria).

Opting for listing requires appointment of certain ‘market intermediaries’ to manage the listing process – merchant bankers, registrars, lead managers, etc.

Since it is extremely difficult for small businesses to meet the requirements for listing, SEBI permitted stock exchanges to create a separate segment for listing of Small and Medium Enterprises (SMEs), called the ‘SME Board’ in 2011. Companies listing on the SME Board are exempt from meeting profitability and net-worth related requirements under the ICDR Regulations - they are only required to have a paid up capital of INR 50 lakhs. However, the framework for listing of SMEs has certain disadvantages:

Any transaction on the SME Board should be for a minimum amount of INR l lakh, which severely limits the ability of ordinary investors (unless they are high net-worth individuals or financial investors) to participate in purchase or sell shares of these companies. As a result, only high volume transactions can be carried out in relation to shares of an SME on the stock exchange.

Apart from increased compliance requirements and listing costs that are typically applicable to listed companies, SMEs may have to incur additional costs for listing. Financial intermediaries are required to provide liquidity to the shares of SMEs for at least 3 years. This increases listing costs for SMEs, as the responsibility for remunerating financial intermediaries for their services is on the listed company.

For this reason, listing may only be practical at a stage when a company’s operations (and correspondingly, its net-worth and assets) have grown significantly large, and not viable for early stage businesses.

Students who are interested in further reading on why the SME exchange may not be a viable funding alternative for startups may visit here.


ii)  Initial Public Offer

Post-conversion, if a company meets the eligibility requirements under the ICDR Regulations, it must make an initial public offer (IPO) in terms of the regulations. A prospectus is also required to be filed with the Registrar of Companies (ROC) and SEBI. Please note that The ICDR Regulations stipulate a detailed process for making an IPO, which will not be discussed here. Key features of the IPO process are:

  • A company is only required to offer 25 percent of its shares to the public in its IPO. Therefore, it is possible for founders and promoters to own substantial stakes in the company post listing.
  • The promoters are required to contribute 20 percent of the total capital (as computed after listing). This is known as ‘minimum promoter’s contribution’ and is locked-in for 3 years. If a promoter has contributed more than 20 percent, the excess contribution is locked-in for a 1 year period.
  • Contribution of non-promoter entities, e.g. investors, is required to be locked-in for a period of 1 year only. Venture capitalists registered with SEBI are exempt from this requirement of lock-in. In addition, at the time of investment, private equity and venture capital investors also specify in the shareholder’s agreement that their names will not be mentioned as promoters in any document which relates to listing of the company, so that they are not subject to promoter lock-in requirements.

iii)  The Listing Agreement

Once a company is listed, it must comply with the listing agreement of the concerned stock exchange (BSE, NSE and any other exchange) on a continuous basis. Although the listing agreement is simply a private contract of the company with the stock exchange which mentions the conditions for listing, it must be drafted strictly in accordance with a ‘model’ Listing Agreement formulated by SEBI. The Securities Contracts Regulations Rules require a listed company to comply with any conditions for listing that are imposed by a stock exchange.

The Listing Agreement provides the formats and periodic reporting requirements in respect of various matters that a company must observe. Clause 49 of the Listing Agreement is known for stipulating the requirements for corporate governance and appointment of independent directors. A listed company must ensure that at least 25 percent of its shares are held by the public at all times. It must also file quarterly shareholding reports and information to the stock exchange whenever certain events take place. 


iv) Acquisition related compliance - Takeover Code

Acquisitions of listed company shares is regulated by the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (Takeover Code) formulated by SEBI. The Takeover Code requires acquirers to notify the listed company (called a target) and the stock exchange on their shareholding if they have acquired a certain percentage amount of shares, discussed under the heading disclosure requirements below. If his shareholding reaches 25 percent, an acquirer is required to make an open offer to the shareholders to acquire a minimum of 26 percent of the company – so as to take his shareholding beyond 51 per cent. The rationale behind making an open offer is that the existing shareholders must be given an opportunity to exit in the event that a new shareholder is set to acquire control of the company.

The open offer requirements can be attracted, say, in a situation where a promoter group sells 30 percent stake in a listed company to a strategic acquirer.

The price for the open offer must be calculated as per a formula mentioned in the Takeover Code, which is based on the highest of i) the contractually negotiated price under the acquisition agreement ii) the price paid by the acquirer in the past 26 weeks for the acquisition of the target’s shares and ii) the average historical prices of the shares. The acquisition price can either be paid in cash or by swap of shares of the acquirer, or a combination of both. A specified portion of the acquisition price must be deposited in an ‘escrow arrangement’, which acts as security that the acquirer has the financial capability to pay the shareholders of the target company if they offer their shares.

As per the Takeover Regulations, the escrow amount must be 25 percent if the price is within INR 500 crores, and 10 percent if it is greater.


Issues related to acquisitions of listed companies

A corporate lawyer spends significant time on transactions related to acquisitions of listed companies. This part may not be very relevant for startup entrepreneurs. This discussion mentions some key issues that are universally faced in acquisition transactions:

Disclosure Requirements

Disclosure requirements must be observed under the SEBI (Prohibition of Insider Trading) Regulations, 1992 (Insider Trading Regulations). The Takeover Code and Insider Trading Regulations require an acquirer to make certain disclosures relating to its acquisitions in the target company. It is required to disclose its shareholding in the target company if its shareholding crosses 5 percent of the shares of the target. After crossing the 5 percent threshold, the acquirer is required to disclose every purchase or sale of 2% or more of the share capital or voting rights of the company. These disclosures are required to be made within 2 days of acquisition, to the stock exchange and the registered office of the target company. The formats for such disclosures are separately specified under the Insider Trading and Takeover Regulations.

Financial investors and listed companies

As discussed before, the goal of a financial investor is to make a profitable exit (often at a valuation greater than 10 times the investment amount) from a company it invested into at the time of listing. However, financial investors also invest in listed companies – these are known as private investment in public equity (PIPEs) transactions. They are typically not interested in managing a company, and therefore they can hold a stake of up to 24.9 percent without having to make an open offer under the present Takeover Code.

Hostile takeovers and takeover defenses

A hostile takeover is a situation when an entity acquires the shares of the target company from the shareholders without the consent of the target’s board of directors. As owners, shareholders are free to sell their shares to an acquirer if his offer is sufficiently attractive for them. As the board cannot prohibit a shareholder from selling its shares, usually the board takes various steps which are within its powers, to make the target company unattractive or expensive for the acquirer (known as takeover defences). Some takeover defences and their treatment under Indian law are listed below:

Issuing new shares to the existing shareholders, which dilutes the acquirer’s shareholding and requires him to pay much more to reach the same level of shareholding percentage in the target company as he originally intended. This is known as a poison pill defense and is not permitted under the Takeover Code after an open offer has been made.

Transferring a key portion of its revenue generating assets (called ‘asset stripping’ or ‘stripping of crown jewels’). This is prohibited under the Takeover Code once an open offer is pending.

Approaching a ‘white-knight’ (that is, an acquirer who is friendly with the target’s board) to present a better offer to the target’s shareholders. Approaching white knights is permitted, as the Takeover Code allows an entity to make a competing bid to shareholders.

Such takeover defences are used by boards in companies in which there is no controlling shareholder (who owns a large chunk of the shares) i.e. shareholding is widely distributed. In such companies the shares of the company are held by many small groups of shareholders and there is no identifiable shareholder group which has the power to appoint or dismiss the managers. In India, hostile takeovers are less prevalent, as promoters own a dominant share in most companies and appoint their own managing team.

d) Foreign Investment in Listed Companies

Apart from the above issues, foreigners can invest in Indian listed companies either through the foreign direct investment route or through the foreign portfolio investor route (shares of a listed company which are on the stock exchange can only be purchased through a foreign portfolio investor). Those shares which are unlisted may be purchased under FDI route as well. Foreign investors are required to comply with exchange control regulations (discussed in an earlier module), competition laws (where applicable) and other sectoral regulations. For example, if the investment is into an insurance company, a bank or a telecom company, necessary regulations of the Insurance and Regulatory Authority of India (IRDA), the RBI or the Telecom Regulatory Authority of India (TRAI) will have to be complied with. 

  1. Raising further investments and debt

Listed companies access capital in a variety of ways – typical forms of capital raising are:

i. Rights issues for raising money from existing shareholders. All existing shareholders will have the opportunity to purchase shares. For example, a company could offer 1 share for every 5 shares that are held by a shareholder. Listed companies need to comply with relevant provisions of ICDR regulations in case of rights issues.

  1. Follow-on public offers - If a listed company wants to undertake a new public issue (one can consider it to be another IPO by a listed company) it is called a follow-on public offer or FPO. An FPO must comply with ICDR regulations.  
  2. Private placements and qualified institutions placement – A company may decide to invite select pre-identified entities to subscribe to its shares. In such It will have to comply with the Companies Act 2013 (200 shareholders can participate in a private placement now, as compared to fifty under the previous Companies Act of 1956) and the ICDR. If the private placement is made to entities known as qualified institutional buyers, it is known as a ‘qualified institutions placement’ (QIP). The money raised through a QIP is limited to five times the networth of the company, and the securities have a 1 year lock-in. If any convertible securities are issued, their conversion period is capped at a maximum of 60 months (5 years).
  3. Bond issuances to the public – A public company can issue bonds (debt instruments) to the public if it is willing to list them on a stock exchange – the SEBI (Listing of Debt Securities) Regulations govern such issuances. Like shares, companies may issue debt directly to the public, or alternately issue it as a private placement to pre-identified buyers (typically institutional investors), but apply for the bonds to be traded in the secondary market. Institutional investors appreciate the liquidity, that is, they can ‘sell’ the loan to another investor in the secondary market. Note that transactions in the secondary market will not generate finances for the company (the company only generates money when a security is freshly issued by it), but the additional liquidity available to an investor makes the issuance of such a security more palatable.

SEBI regulations may require in-principle approval of the stock-exchanges on which the securities are listed as well. Apart from limitations on the quantum of finance that can be raised, type of entity that shares can be issued to and other restrictions on the shares (such as lock-in), one should also be mindful of the kind of disclosure requirements and resolutions (at both shareholder and board level) that are necessary for obtaining approvals. 

Insider trading and unfair trading rules
Work around insider trading regulations is an important component of the securities law or compliance practice of various law firms and consultants – note that this work only arises in connection with securities of listed companies.  Insider trading, that is, purchase, sale or other kinds of dealing in shares on the basis of unpublished price-sensitive information is prohibited with respect to listed public companies. Conceptually, insider trading regulations are not applicable to private companies, as they impose restrictions on transferability and there is no ready market for trading of their shares. Any purchase or sale of private company shares involves due diligence to be undertaken on the company’s business by the purchaser, which may naturally involve uncovering undisclosed information that impacts the company’s valuation and share price. However, the language of the new Companies Act 2013 prohibits insider trading even for private companies, which is ironic – other international jurisdictions punish insider trading only with respect to listed company shares. While this provision under the new Companies Act has definitely caused some confusion, we are not aware of instances where it has actually impacted sale or purchase transactions. Various stakeholders have requested the government for a clarification on this.
Similarly, the Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market Regulations, 2003 (PFUTP Regulations) specify penalties for other activities which amount to a manipulation of the securities market. Recently, SEBI imposed a  ban on DLF promoters accessing securities market as the PFUTP and the ICDR Regulations were violated (see SEBI’s order here). 

(The ICDR Regulations, Takeover Code and the Insider Trading Regulations are available on the following link on the SEBI website


Students who are interested in learning about takeovers and takeover defences in more detailed are encouraged to read any of the following books:

Cold Steel by Byron Ousey & Tim Bouquet (on the acquisition of Arcelor by Mittal Steel)

b) Barbarians at the Gate by Bryan Burrough & John Helyar (on the acquisition of RJR Nabisco in the late ‘80s, this is a great insight into the private equity industry and takeover transactions)

c) Structuring Mergers and Acquisitions: A Guide to Creating Shareholder Value by Peter Hunt (textbook)


 Eligibility Criteria under ICDR (see Regulation 26)

A public company which In order to be eligible to undertake an IPO and list on a stock exchange, a public company must fulfill the following requirements:

It must have had assets of INR 3 crores each in the past 3 years

·   It must have made profits in the 3 out of the previous 5 years

·   It must have a net worth of at least INR 1 crore in each of the past 3 years (net-worth is the difference between assets and liabilities (where liabilities does not include capital))

In addition there are additional requirements which must be observed with reference to the size of the issue, or if the company has changed its name in the previous year.

If all of the above conditions are not met, the company can only undertake the IPO if:

a sizeable portion of the IPO shares are allotted to large institutional buyers (who are considered qualified institutional buyers within the ambit of SEBI Regulations), banks or financial institutions, and

· face value of the capital (post issue) is at least INR 10 crores, or there are financial intermediaries who engage in market-making activity (that is, providing liquidity to the shares by providing quotations to persons interested in buying or selling shares) for 2 years.

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